Search Results

In spite of earlier promises to the Eurogroup the Greek government continues to persecute former head of ELSTAT Andreas Georgiou and two of his former senior staff. As long as the never-ending prosecutions continue the Greek government cannot claim it is seriously committed to turn the country around. By continuing these persecutions the Greek government is clinging to the story that the fraudulent statistics from around 2000 to 2009 are the correct ones, thereby in effect presenting the 2010 revisions as criminal misreporting. Thus, the Eurogroup and other international partners should refuse to cooperate with the Greek government as long as these trials continue.

In spite of earlier acquittals time and again, Greek authorities keep finding new ways to prosecute the former head of ELSTAT. The latest development happened last week, July 18 and 19. As at the trial in May, there was a shouting and insulting mob of around thirty people present in court at the trial on July 18 when Georgiou was being tried for alleged violation of duty. The mob was clearly cheering on the accusation witnesses in a disturbing way; again, something that would be unthinkable in any civilised country.

On July 19, the Chief Prosecutor of the Greek Supreme Court proposed yet again to annul the acquittal of Georgiou and two senior ELSTAT staff for allegedly intentionally inflating the 2009 government deficit and causing Greece a damage of €171bn.

Mob trial

After being unanimously found innocent of charges of violation of duty in December last year by a panel of three judges, as the trial prosecutor had recommended, this acquittal was annulled by another prosecutor. This is how this farce and mockery of justice has been kept going: acquittals are annulled and on goes the persecution.

This trial will now continue on 31 July when judgement is also expected – and it can be fully expected that Georgiou will be found guilty.

This report from Pastras Times gives an idea of the atmosphere at the trial: The professor [Z. Georganda] argued that from the data she has at her disposal, she considers that the 2009 government deficit was around 4 to 5% [of GDP] – a statement, which ignited the reaction of the audience that began applauding and shouting: “Traitors” “Hang them on Syntagma square”… The witness continued her point arguing that Greece had one of the lowest deficits “but we could and we were paying our debts because there was economic activity. Georgiou led the country to prolonged recession.” Ms. Georganda said characteristically, causing the audience to explode anew.

A pattern over six years: acquittals followed by repeated prosecution

As everyone who knows the story of the discoveries made in 2009 and 2010 of the Greek state statistics Georganda’s arguments are a total travesty of the facts, a story earlier recounted on Icelog (here the long story of the fraudulent stats and the revisions in 2010; here some blogs on the course of this horrendous saga).

July 19 was the deadline for the Chief Prosecutor of the Supreme Court, Xeni Demetriou to make a proposal for annulment of the decision of the Appeals Court Council to acquit Georgiou and two former senior ELSTAT staff of the charge of making false statements about the 2009 government deficit and causing Greece a damage of €171bn. Demitrou opted to propose to annul the acquittal decision.

The Criminal Section of the Supreme Court will now consider her proposal for the annulment of the acquittal. If the latter agrees with the proposal of the Chief Prosecutor of Greece, the case will be re-examined by the Appeals Court Council. If the Appeals Court Council, under a new composition, then decides to not acquit Georgiou and his colleagues, the three will be subjected to full a trial by the Appeals Court. If convicted they face a sentence of up to life in prison.

This would then be yet another round of the same case: in September 2015, the same Prosecutor of the Supreme Court, then a Deputy Prosecutor, proposed the annulment of the then existing acquittal decision of the Appeals Court Council. In August 2016, the Criminal Section of the Supreme Court agreed to this proposal, which is why the Appeals Court Council re-considered the case.

And so it goes in circles, seemingly until the legal process gets to the “right result” – trial and conviction.

Can the three ELSTAT staff get a fair trial?

Given the fact that the same case goes in circles – with one part of the system agreeing to acquittals, which then are thrown out, in the same case – it can only be concluded that Andreas Georgiou and his two ELSTAT colleagues are indeed being persecuted for fulfilling the standard of EU law, as of course required by Eurostat and other international organisations.

As this saga has been on-going for six years it seems that the three simply cannot get a fair hearing in Greece. This raises serious questions about the rule of law in Greece and the state of human rights there.

At the same time the last chapter in this six-year saga took place now in July, €7.7bn of EU taxpayer funds, a tranche of EU and IMF funds for Greece, was paid out. This, inter alia on the basis of the statistics revised in 2010, for which the Greek state keeps prosecuting the ELSTAT statisticians thereby de facto claiming these statistics were the product of criminal misreporting.

Tsakalotos breaks his promise

As reported earlier on Icelog the Eurogroup has clearly noticed the ELSTAT case: at the Eurogroup meeting of 22 May ECB governor Mario Draghi raised the matter, saying that as agreed earlier, priority should be given to implementing “actions on ELSTAT that have been agreed in the context of the programme. Current and former ELSTAT presidents should be indemnified against all costs arising from legal actions against them and their staff.”

Greek minister of finance Euclid Tsakalotos announced that “On ELSTAT, we are happy for this to become a key deliverable before July.”

In an apparent attempt to appease the Eurogroup, it was announced this week that ELSTAT will pay legal costs for the former ELSTAT employees facing trial. However, the legal provision proposed by the government is wholly inadequate and may actually do more harm than good to Georgiou and his colleagues.

For example, it says that these official statisticians will have to return any funds they get if they are convicted. This is legislating perverse incentives. It is like saying: Convict them otherwise we will have to pay them.

The proposed legislation also puts a very low limit on the amounts that would be covered. In addition, it would not cover costs of legal counsel, costs of interpretation of foreign witnesses, nor would it cover the cost of travel and accommodation of these witnesses when they come to Greece abroad to be defence witnesses for Georgiou. There also seems to be a labyrinthine process for accessing the funds making it unlikely the accused will ever see any reimbursement of cost.

It is thus quite clear from events this week that not only has Tsakalotos broken the promise he gave to Draghi and the Eurogroup in May – he clearly has no intention of keeping it. The question is how long the Eurogroup will tolerate broken promises and the fact that by prosecuting the ELSTAT staff the Greek government does indeed keep portraying the revised statistics as criminal misreporting.

According the Kathimerini‘s cartoonist, the ELSTAT saga is a simple one: New Democracy PM 2004 to 2009 Kostas Karamanlis is unwilling to let go of the persecution – “You thought you would get away? Where do you think you are going, eh Georgiou?”

Now that ordinary Icelanders can invest ISK100m abroad a year and buy one property abroad, life is returning back to normal after capital controls or at least for the 0.01% of Icelanders that will be able to make use of this new normal. This new CBI regime was put in place on the last day of 2016.

For all others, capital controls have for a long time not been anything people sensed in everyday life. The controls really were on capital, in the sense that Icelanders could not invest abroad, but they could buy goods and services, i.e. ordered stuff online and, mostly relevant for companies, paid for foreign services.

The almost only tangible remains of the capital controls regard the four large funds – Eaton Vance, Autonomy, Loomis Sayles and Discovery Capital Management – still locked inside the controls with their offshore króna (by definition króna owned by foreigners, i.e. króna owned by foreigners who potentially want to exchange it to foreign currency).

I’ve written extensively on this issue earlier, recently with a focus on the utterly misplaced ads regarding the policy of the Icelandic government (the policy can certainly be disputed but absolutely not in the way the ads chose to portray it; see here and here; more generally here). From over 40% of GDP end of November 2008, when the controls were put in place, the offshore króna amounted to ca. 10% of GDP towards the end of 2016 (see the CBI: Economy of Iceland 2016, p. 75-81.) The latest CBI data is from 13 January this year, showing the amount of offshore króna at ISK191bn, below 10% of GDP.

It now seems there have been high-level talks and as far as I can understand there is great willingness on both sides to find an agreement, which would most likely involve an exit rate somewhat less favourable than the present rate (meaning there would be some haircut for the funds, i.e. some loss) and also that they would exit over some period of time (they have earlier indicated that they are in no hurry to leave).

As before, the greatest risk here is political: will the opposition or parts of it, try to use this case to portray the government as dancing to the tune of greedy foreigners? Icelanders have had a share of the populism so prevalent in other parts of the world but Icelandic politics is by no means engulfed by it.

Arguments in this direction can’t be ruled out but the argument for solving the issue is that Iceland should be moving out of the long shadows of the 2008 collapse, the Central Bank has been buying up foreign currency in order to fetter the ever-stronger króna and this is a problem easier to solve now with the economy booming rather than at some point later in a more uncertain future.

Obs.: on 4 June 2016 the CBI announced a new instrument to “temper and affect the composition of capital inflows.” Some people call this a new form of capital controls. I don’t agree and see these measures, as does the CBI, as a set of prudence rules, announced as a possible course of action already in 2012. Over the last decades other countries have taken a similar course to prevent the inflow of capital that could in theory leave quickly.

Congressman Dennis A Ross has written a letter, see below, to Sunil Sabharval, US Executive Director at the International Monetary Fund, IMF, inquiring as to what US officials knew about the offshore króna actions taken by the Icelandic government. The Congressman’s mission is clearly to safeguard US interests, i.e. the interest of US funds holding offshore króna, a problem I have dealt with extensively in earlier blogs, inter aliahere. Although not stated explicitly, the most sensitive underlying assets are sovereign securities, payable in Icelandic króna.

In the letter the reasons for the Icelandic collapse are somewhat simplified to say the very least, apparently easier to blame the government than the banks; also rather funny to see the offshore króna holders treated as entirely blameless lured by good deals, another saga.

The thrust of the letter is that since Iceland has now recovered well from its 2008 crisis Iceland shouldn’t be discounting the offshore króna or offering the investors punitive terms. – Further to this: intriguingly, Iceland had not made a loss on the 2008 banking crisis but a gain of 9% of GDP(!), according to the latest IMF Article IV Consultation statement on Iceland, from June 22.

The Congressman points out that the offshore króna holders (i.e. the largest holders) have come up with various solution but Icelandic authorities have been unwilling to take any notice. He now wants to know if US officials are aware of what is going on – and he expects an answer, which as far as I know has not yet been given. IMF has preached a cooperative approach to lift capital controls, reiterated in its June statement on Iceland but seems to consent with the action taken by Icelandic authorities re the offshore króna.

Here is Congressman Ross’ letter:

Last time, this time – in general

As I recounted at length in the years, months and days up to the plan to lift capital controls on the estates of the banks, presented June 8 last year, Icelandic authorities dithered for long due to infighting until they took the plunge – to be fair, the authorities claimed it just took time to prepare the plan and refused all allegations of infighting. But the plunge wasn’t taken until it was clear the plan was supported by the largest creditors.

The same now with the offshore króna action, it all took longer than had been planned, my understanding is that it took long because of different views; however, those involved say it just took the time it took, complicated matters etc. Yet, this time the government acted unilaterally, no agreement with the largest offshore króna holders. Thus inter alia the above letter, I assume.

The government claims the offshore króna holders do not act as a group, contrary to the creditors to the old banks. That isn’t wholly correct – each estate had to be dealt with separately and support was sought for each estate. Thus, the creditors were not a unified group but three groups. So much for that argument now re the offshore króna holders.

As a ground for pride Bjarni Benediktsson minister of finance has pointed out that there was no legal aftermath to the plan last year. Quite true but that’s because the plan wasn’t passed until creditors’ support was ensured. Which is exactly the opposite of now where the government has acted unilaterally re the offshore króna holders who consequently have taken the first steps towards legal action.

In addition, there is the concern Congressman Ross shows, as well as articles in the Wall Street Journal and FT Alphaville, as I have mentioned in earlier blogs – offshore króna holders are clearly trying to point out to the world that Iceland, by planning a haircut on the offshore króna assets (when they are converted into foreign currency) doesn’t intend to honour its international commitments.

Last time, this time – in particular

I have earlier pointed out that I was wondering if the Icelandic government was going to make use of some “tricky teleological interpretation” in its dealings with offshore króna holders.

I didn’t explain in any detail what I had in mind but here it is:

Long before the June 8 plan last year, the Icelandic government claimed it couldn’t possibly have anything to do with the composition of three private banks. Right, except that composition was meaningless if it wasn’t clear beforehand how much of the Icelandic assets creditors (only 10% of the assets went to Icelandic creditors, mostly the CBI) could convert into foreign currency. Composition agreement couldn’t be reached until the government had found a solution i.e a haircut, which the creditors could agree to – that was what mostly took so long to solve.

This time, the core of the offshore króna problem is similar regarding sovereign securities. The government can claim that it’s honouring all its obligations as it will pay out any such securities in full and on time… in króna. The thing is that offshore króna holders can – or could, the auction is now over – either choose to convert at ISK190 a euro (the onshore rate is now ISK136, was ISK139 at the time of the auction) or have their króna kept on a special deposit account at 0.5% interest rates with no maturity in sight. The question is if this is seen as fair… or not.

Last year, the government came to the conclusion that it had to step in to facilitate a composition. Now, it’s just shrugging its shoulder and the message is, as I’ve stated earlier, “let them litigate” – alors, last year, the goal was to prevent legal action, this year it’s bring it on…

The outcome of the offshore króna auction 16 June has now been made public: offers at the rate of ISK190 a euro or lower were accepted. According to the Central Bank of Iceland press release a “total of 1,646 offers were submitted and 1,619 accepted; however, these figures could be subject to change upon final settlement. The amount of the accepted offers totalled just over 72 b.kr., out of nearly 178 b.kr. offered for sale in the auction.” – The on-shore rate is ISK139 to the euro. The question is how credible this outcome is, given the good economic conditions in Iceland. (Further to the background see an earlier Icelog here).

Although the auction apparently was a final offer the CBI is now offering to “purchase offshore króna assets not sold in the auction at the auction exchange rate of 190 kr. per euro.” The terms and conditions will be published tomorrow with the deadline at 10 o’clock this coming Monday morning, 27 June. The finale outcome of the 16 June auction and potential transactions in the following days, until Monday morning, will be published that Monday with settlement of both transactions completed on that day.

This outcome is far from the stock of ISK319bn that the offshore króna amounts to. The auction was supposed to be the last in a series of 23 auctions; this offer to buy offshore króna at the auction price of ISK190 is now a tail to that last auction.

In an interview on Rúv tonight, CBI governor Már Guðmundsson said that out of 1,646 offers submitted 1,619 had been accepted, or 98%. This means there are now a whole lot fewer offshore króna holders left – but the problem is, as Guðmundsson rightly acknowledges, that all the big funds holding these assets are holding on to their króna. “It is clear that the rather big holders have either not participated or offered a rate we could not accept,” said Guðmundsson.

In a cage – at the back of the queue

The governor said that with the auction out of the way, capital controls can now be lifted on domestic entities and individuals, i.e. Icelandic companies, pension funds etc. The process has been designed in such a way, according to Guðmundsson “that those who do not leave now stay in a similar financial environment as they have been in so far as to investment offers with added changes, which were necessary to secure that this environment would be stable even if we lift controls on domestic entities. They (i.e. the offshore króna holders) will now go to the back of the queue, they were at the front and then at some point it will again be their turn.”

This is undoubtedly a description the big offshore króna holders will contest. They will claim that conditions have been seriously tightened. When their assets mature these assets will automatically go into deposits at 0.5% interest rates, effectively negative interest rates, held with the CBI, very much akin to the cage that Guðmundsson once described so vividly at a meeting in Iceland.*

Thus the big offshore króna holders, who did not participate (or offered a non-accepted rate) will now feel they are in a cage at the back of a queue not knowing when they will be released. Or in other words: they will claim that the sovereign isn’t paying back its loans.

Calling things their right names

What is it called if a country pays only some of its debt? The term is “selective default” – and worryingly that’s now the term attached to Iceland if offshore króna holders, where Icelandic sovereign bonds and T-bills are the underlying assets, are not paid out in full.

Offering a rate of ISK190 to a euro when the on-shore rate is ISK139 in a country doing pretty well seems like a drastic haircut – and it is incidentally involuntary, from the point of view of the offshore króna holders, although the Icelandic government claims there was a fair second offer, i.e. the cage at the end of the queue.

In a defiant answer to a WSJ op ed, minister of finance Bjarni Benediktsson rejects that Iceland can be compared to Argentina. However, he fails to point out that after fighting creditors for fifteen years Argentina did indeed finally settle with creditors. A country can claim as much as it wants that it’s honouring all its obligation but the arbiter is not the country itself but the International Swaps and Derivatives Association, ISDA, which decides on which events release credit default swaps.

Reputation risk

I have earlier talked about the mixed messages from Iceland in dealing with creditors. Last year, great care was taken in negotiating with creditors when it came to lifting capital controls on the estates of the three collapsed banks.

This time, when the sovereign is directly involved, contrary to last year, the strategy is to offer a cage at the back of a queue with no date as to when that backend will be served. There must be a strategy somewhere but I can’t see it, which is worrying since the outcome could be lengthy court cases in all and sunder jurisdictions for years to come. In the world of short-term politics that would inevitably be a problem for another day and another government.

In the meantime, the financing cost of all things Icelandic, whether state or private sector, will either go up or stay as it is, instead of going down as it well could soon with the bright economic prospects there are (and as Moody’s had already beckoned). This was kept in mind last year. Now it seems that this past of playing carefully was not a prologue to the present but an aberration. Consequently, Iceland might be back to a costly future of reputation risk.

*At a public meeting on the offshore ISK in 2013, some of those present argued that the solution to the Icelandic current account problem was just to cage in the foreign-owned assets so capital controls could be lifted on the domestic part of the economy. Present at the meeting was CBI governor Már Guðmundsson who pointed that when new investors would then arrive in Iceland they would see the cage and ask who was in it. “The investors who invested in Iceland last time around.” (From an earlier Icelog).

Update: This morning, Wed. 22 June, minister of finance Benediktsson talked at Euromoney Global Borrowers and Investors Forum where I interviewed him afterwards; Benediktsson claimed the offshore króna auction had been a success in terms of the many bids received and now those remaining would have to wait. He said there had been no legal aftermath following the composition of the estates last year, precisely because it had been well prepared but said he was not worried this time. It was to be expected that the hedge funds holding offshore króna were making a noise but that was nothing the minister was worried about.

While the Icelandic government is planning to play clever and give offshore króna holders, i.e. sovereign bondholders, a haircut – apparently because the Icelandic economy isn’t strong enough – Kaupthing, the largest owner of Arion bank , and that bank are assessing how to make use of the strong Icelandic economy with regards to Kaupthing’s shares in Arion. An intriguing case of “mixed messages”… now that another step is being taken to further ease the capital controls, in place since November 2008.

In the past few days, two articles have appeared – an op ed in Wall Street Journal and a guest blog on FT Alphaville – spelling out that Iceland is about to opt for a sovereign default, quite voluntarily and apparently with open eyes.

Iceland, of course, doesn’t quite see it that way, as I explained recently at some length. That said, I have been utterly baffled why Iceland, having taken such care last year to avoid all legal risk by negotiating with the creditors of the three fallen banks, is now reverting to the tactic, which at the time of the collapsing banks in October 2008 was half (but not quite) jestingly called “xxck the foreigners.”

Last year, some foreign pundits were comparing Iceland’s situation with Argentina, a wholly misplaced comparison since the government was no partner to the composition of the estates of the banks though the government had to take on the role of a facilitator in solving problems related to the foreign-owned, i.e. offshore ISK assets of the estates.

The outcome was around 75% haircut of the Icelandic assets. So successful was this step towards easing capital controls that foreign inflows into sovereign bonds started at once, now amounting to around 5% of GDP – nothing compared to the 44% of GDP in November 2008 when the capital controls were put in place, under the auspice of the International Monetary Fund.

This time the government IS the other party since the offshore ISK assets are sovereign securities, which led James Glassman in the WSJ and then Arturo Porzecanski* in FT Alphaville to compare Iceland to Argentina: Iceland was about to turn into a very chilly version of Argentina.

Actually, after years of legal wrangling Argentina has of course finally settled with creditors, advised by the law firm Cleary Gottlieb, also advising Iceland (though somewhat ominously Cleary was the adviser not only in solving the Argentinian problem but also during the dark years); Argentina is now happily borrowing again. Financial firms have a notoriously short memory, after all they can’t afford to hold grudges. But the legal wrangling all over the world did blight the lives of Argentinians for around 15 years and no need to minimise how unpleasant and costly it all was.

The Icelandic situation right now is that tomorrow, on June 16, the Central Bank of Iceland will hold an auction for OS ISK holders (all info here). After setting the terms in such a way that a hair cut was all but inevitable for those participating in the auction and negative interest rates for those who didn’t the terms were changed this week – last minute wisdom… or panic, depending on the reader:

The amendments to the Terms of Auction removes ambiguity about whether, in spite of the auction results, the Bank can decide on a more favourable auction price than is specified in the table. As before, all owners of offshore krónur will receive the same price for their krónur, as the auction has a single-price format, which applies irrespective of whether the price accepted is lower than is specified in the table. It is appropriate to reiterate that as before, the Central Bank reserves the right to accept some or all of the offers submitted, or to reject all of them (emphasis mine).

Effectively, the CBI can now choose to accept the best offer… or well, come up with a better one.

Two questions: why this sudden and very late change and why was such care taken last year to negotiate whereas now it’s a take it or leave it offer?

As to the sudden change I don’t know but given the fact that a high participation is needed to solve the issue – or otherwise the OS ISK will be locked up in a really cold dungeon, i.e. at negative interest rates with no maturity in sight but only some vague words of a revision when suitable – it can be surmised that the CBI sensed that the large OS ISK holders were not going to participate: they have indicated as much. Although the auction is set for June 16 this isn’t the kind of auction where bidders walk in from the street and wave their hands; the bids will have been placed earlier due to time-consuming procedures.

On the different approach last year v now I had already made some guesses in my last blog: whetted appetite for collecting more for the state coffers, following last year’s windfall from the estates’ ISK assets; political need for a victory before the planned election in October (no date set yet); the certainty that OS ISK owners can’t rely on Icelandic courts to rule in their favour against the sovereign; using the harsh terms as a stick to beat the ISK holders (but when?) – I don’t find any of these very plausible, partly because I don’t see any of these reasons as a winning strategy.

One lesson from the Argentina very very long struggle is that international creditors rely on a many-pronged strategy, i.a. legal actions not only in the home country of the bond issuer but in many jurisdictions. I refuse to believe that Icelandic courts would side with the sovereign against the law but ultimately that’s not a deciding point since legal action will, most likely, be taken in many jurisdictions. And it’s not up to Iceland to define if a certain action is a default event or not.

The fact that two non-journalistic articles have already been published in international finance media indicates interest in certain quarters and a preparation, meaning that the large OS ISK holders, quite unsurprisingly, already have their plan A B and C mapped.

Considering the strong Icelandic economy Iceland has in general a weak case for forcing a haircut on holders of Icelandic sovereign bonds. The government can certainly hold its course but testing its limits to such a degree that it loses control of the situation – as it would i.a. if legal action were taken against it – shows at best lack of realism and worst a staggering stupidity.

That brings me to the same question as earlier: after the care taken last year to avoid time consuming action and legal risk why is the government and the CBI now opting for a course that involves all the things religiously avoided last year?

*In his blog Porzecanski is dismayed that the CBI and the government have recently passed a Bill to temper inflows. This action does however not come as any surprise. Already in its 2012 outline of prudence rules following the lifting of capital controls the CBI spelled out various measures which would be used in the future to secure financial stability. Considering the fact that the inflows in the years up to 2008 ultimately caused Iceland to opt for the capital controls, now being eased, this prudence is highly sensible, in my opinion. Yes, interest rates could be lowered in order to temper the appetite of international investors but that’s another thought for another day. In short, I definitely don’t share Porzecanski’s view though I can see his point. There is an Icelandic saying that a burnt child stays away from the fire – and that is, I’m sorry to say, an apt description of the mood in Iceland re foreign inflows.

Updated: Minister of Finance Bjarni Benediktsson has now responded in the Wall Street Journal, claiming that Iceland shares little with Argentina except that creditors have bought distressed debt at knock-down prices. – However, in the end it only matters who holds the debt, not how it was acquired. Also, Benediktsson does not mention that after legal wrangling, at great cost also legal cost, over 15 difficult years Argentina did indeed negotiate with creditors.

“Is this a retrade?” creditors will be asking themselves as they scrutinise the agreement reached between the Icelandic Task Force, the government’s advisers, and representatives of the three estates. As regards LBI and Kaupthing, probably not – relevant decisions will be made according to the June 8 agreement. However, Glitnir is a different case: yes, it is a retrade but the June agreement was probably never going to work for Glitnir. the main thing is that the present agreement with Glitnir and earlier with LBI (and Kaupthing probably by the end of this week), which means that the yoke of the capital controls will be off Icelandic shoulders.

Without much ado LBI announced last week that it was ready for a composition following the June 8 guide-lines. The LBI situation is very different from Glitnir and Kaupthing – LBI has hardly any ISK assets to speak of, it doesn’t own Landsbankinn, the Icelandic state does. The relative ease can be seen from the fact that the LBI stability contribution is only ISK14bn. The lion share of the LBI funds goes to priority creditors, i.e. the UK Treasury and those who bought the claims of the Dutch Central Bank earlier this year but the stability contribution will be paid by those holding general claims.

Kaupthing is due to pay ISK120bn in stability contribution according to the June 8 guidelines and will most likely do so. Will its main Icelandic asset, Arion bank, also end up in public ownership? That is unlikely, the constellation in Kaupthing is entirely different compared to Glitnir. Kaupthing’s only ISK asset is Arion bank, whereas Glitnir had around ISK150bn in ISK cash and assets, in addition to Íslandsbanki, i.e. the problem of foreign-owned ISK assets is much greater in Glitnir than Kaupthing.

Consequently, Glitnir was a much harder nut to crack. The task force accepted Glitnir’s solution in the letter Glitnir sent in, as did the other banks, in connection to the June 8 plan; i.e. the task force accepted that the solution Glitnir suggested fulfilled the stability criteria. However, at a closer scrutiny – most likely done by the CBI (which should have been kept closer to the negotiations because they have the necessary insight but weren’t) – it became clear that no, it actually did not. Therefor a retrade, i.e. a new agreement for Glitnir.

Discussing the Glitnir agreement on Rúv October 20 minister of finance Bjarni Benediktsson stated that “we (i.e the government) intervened in the process at the right time.” Another way to look at it is that it took the government two and a half years of wrestling to agree to sing from the same hymn sheet and accept that should the process be consensual the only sensible way was to negotiate the outcome with creditors.

After deducting priority claims the stability contribution amounts to 80% of the ISK assets in the tree estates or 20% of their total assets – interestingly, numbers that have been swirling in the air from 2012. Something in this direction has always been the obvious solution. The delay in acting on it was the political price.

The contribution, which in June amounted to ISK334bn – ISK14bn from LBI, ISK120bn from Kaupthing (given that the finalising brings no further changes) and ISK200bn from Glitnir – will now most likely amount to almost ISK380bn, with the increase coming from the new Glitnir agreement.

The June plan versus the new plan

Benediktsson mentioned that the government had intervened, a word which could for years not be uttered aloud. In the October 20 statement it is for the first time mentioned that there were indeed negotiations. This was necessary because contrary to what the task force stated in June the Glitnir June proposals did indeed not fulfil the CBI stability criteria.

So what is the difference between the June and the new proposals (see the details here)?

The key item is Íslandsbanki. At the end of last year the bank’s capital was ISK184bn of which ISK175bn or 95% belongs to Glitnir, 5% to the Icelandic state (which owns 5% shares in the bank).

The June plan was to lower the capital by a dividend of ISK37bn, i.e. dividend paid out in ISK, in addition to dividend paid out in foreign currency, amounting to ISK16bn, roughly reducing the bank’s capital down to ISK120bn. The dividend paid out in ISK was to go towards the stability contribution, i.e. to the Icelandic state; the foreign currency dividend to creditors.

The plan was all along to sell the bank for foreign currency, i.e. convert this ISK asset into foreign currency asset so the creditors could easily be paid out without upsetting the holy grail in all of this – Iceland’s balance of payment.

Further, the June agreement stipulated that 60% from the expected sale in foreign currency would go towards the stability contribution, i.e. paid in foreign currency whereas the Glitnir’s creditors would get 40%.

The June snag

So far, so sensible. Except this apparently so perfect plan had one snag: Íslandsbanki did not have the financial strength to pay all this dividend in addition to the deposits of the failed banks, which creditors could take over at composition (the three estates have deposits in the three banks – Landsbankinn, Arionbank and Íslandsbanki – amounting to ISK109bn in ISK and ISK138bn in foreign currency at end of 2014; table vii-2).

This problem became clear in July when Glitnir and Íslandsbanki came to an agreement regarding the recapitalisation of Íslandsbanki which involved extending the maturity of Glitnir’s deposits in Íslandsbanki. The stability contribution clearly had to be paid out in cash, not by a bond.

So what are the changes made in the new plan?

The creditors pass on the ISK16bn dividend (that should have been paid out in foreign currency) and they also pass on the 40% in the hoped-for foreign currency sale of Íslandsbanki (which frankly did not seem about to happen, also because the foreign owners might not suit the political commanding heights in Iceland) – in total, they pass on ISK63bn.

What do they get in return for this sum? They don’t need to refinance a subordinate foreign currency loan, which the Icelandic state placed in Íslandsbanki, set up to entail Glitnir’s domestic operations. In Glitnir’s accounts end of June 2015 this is put at ISK20bn.*

Thus, what the creditors are in reality giving up is ISK16bn + (0.4 x 120bn) – 20bn = ISK44bn or 25% of their share of Íslandsbanki capital of ISK175bn. The task force is offering them to buy the bank at price to book 0.75.

Given that Landsbanki and Kaupthing will pay respectively ISK14bn and ISK120bn in stability contribution and Glitnir will now pay additional ISK244bn, the total is ISK378bn.

The most important outcome is that is the one Benediktsson has long been advocating, as has i.a. the IMF and the CBI: a consensual agreement, meaning that creditors take this as a final solution and will not sue the Icelandic state neither for this nor earlier actions, i.a. tax on the estates in 2014. No legal wrangling, no litigation all over the world that could delay the lifting of the capital controls for unforeseeable future. The stability tax is out, the stability contribution in.

Through the prism of Icelandic politics

Nothing can be understood in this lengthy process since Kaupthing and Glitnir presented their composition plans in 2012 and 2013 except through the prism of Icelandic politics.

Panic politics is now a passé possibility for the Progressive party. At ca. 10% in polls, compared to 24% in the elections in spring 2013, prime minister Sigmundur Davíð Gunnlaugsson could in theory have attempted to raise hell and claim that the difference between the tax and the contribution was unacceptable and he was the man fighting Iceland’s case to wring more out of creditors than the paltry ca. ISK400bn compared to ISK850bn from the tax. However, with the standing of the Pirate party in the polls – ca. 35% over the last few months – any discontent is more likely to fatten the Pirates rather than the progressives.

The June plan was to a certain degree presented on false premises by putting so much emphasis on the tax and how much it would bring. The risk linked to the non-consensual stability tax was humongous, compared to low risk of a negotiated and consensual stability contribution. These numbers have lingered on in the debate, thus kept on skewing it.

It took less than six years to bankrupt the privatised banks (they were fully privatised by end of 2002), many Icelanders will now feel uneasy that the state now owns not only one but two banks. However, that is a challenge for Icelanders to solve and will test how much, if anything was learnt following the 2008 collapse.

A good deal for Iceland?

Is this a good deal for Iceland? And is this a good deal for creditors? Yes. Both parties have a great interest in bringing the matter to a close. Iceland needs to move out of the shadow of the capital controls and now that the economy is booming again (perhaps dangerously so but that’s another saga) it’s paramount to make full use of the good times. The creditors will want to run for the exit, with whatever they get in order to invest elsewhere and get out of the sphere of Icelandic politics.

Both parties will be asking themselves what is the price of risk. Reducing uncertainty will be a profit for both parties and not the least for Icelanders themselves. In addition, Iceland should be worried about the reputational risk. As I have pointed out earlier the path towards a deal has, from the point of view of foreigners “been tortuous, with new deadlines, conflicting messages from Icelandic politicians and deals that are a deal until the authorities think of something else. Some may think this is maverick and cool, little Iceland fooling the financial markets. Others will beg to differ.”

I have earlier written extensively on all aspects of the estates and capital controls so please browse and search if you are looking for specific issues.

*Update: as stated, creditors don’t need to refinance the loan – not easy to measure the time value of money involved. They do however get what remains of the loan as a payment for Íslandsbanki, which means that their gain is a bit more than ISK20bn, to be precise.

The Icelandic state will take over Íslandsbanki from creditors of Glitnir, according to a press release from Ministry of finance. This means that the June 8 agreement with Glitnir creditors has been changed. However, the trade off is certainty for a possible future upside. Given the Icelandic political climate, that is probably not a bad deal.

LBI, old Landsbanki, has already announced its intention to do a composition and is on track with it, meaning that it must already have the blessing of the government.

Kaupthing will most likely finalise its composition this week. That means that all the three banks are on track towards a composition and a stability contribution.

And the delayed Financial Stability report from the Central Bank of Iceland is now out, published on Friday to no fanfare. Intriguingly, in the introduction there is no mention of the stability tax, only the consensual contribution, levied on the estates, exactly as is now being done.

The waiting for Godot turned into a theatrically staged presentation at Harpa by the prime minister and minister of finance, assisted by their two main Icelandic experts. The grand plan to lift capital controls has now seen the light of day. If realised as planned the future looks bright for Iceland. But there are still political risks until the planned good deeds are indeed done.

Here are the main points of the new plan: the size of the problem is ISK1200bn, $9bn, ca. 60% of Icelandic GDP where ISK300bn, $2.2bn, is the original overhang from October 2008 (mostly carry trade funds, which flowed to Iceland in the years before the collapse) and then ISK900bn, $6.7bn, in the estates of the failed banks: ISK500bn, $3.7bn, is pure ISK assets, ISK400bn, $3bn, is debt paid in FX by Icelandic entities.

According to the new plan, there are “non-negotiable stability conditions” the estates of the three failed banks have to meet. These conditions are defined in the plan, but not spelled out in króna. On the basis of these conditions the estates have to pay a “stability contribution,” as part of the composition agreement; again, the amount of the contribution is not stated.

The composition agreement has to be in place by the end of the year. If not, the estates will be forced into bankruptcy and will then have to pay a 39% “stability tax,” a one-off tax, of ISK850bn, $6.3bn, due on 15 April 2016. However, there is a deduction to the tax, meaning it will be, according to the presentation, ISK680bn, $6.3bn.

This is all stated in the plan – but in interviews afterwards Bjarni Benediktsson minister of finance the contribution, which he aims at and not the tax, will be ISK500bn.

The rhetoric used implied that the state could, on the basis of emergency and imminent danger, overrule private property rights, i.e. of the creditors. This sounded somewhat bombastic given that Iceland is a thriving country and well capable of solving the problems related to the foreign-owned ISK. Also, there was emphasis on solving the problems for the “real economy” – all of this was interesting, clearly used to create a sense of the danger the government is averting with its plan. This is the rhetoric in the world of staged politics and the Icelandic government is no exception here (except that its spin is always rather visible, i.e. not very professional as good spin should be invisible).

According to the presentation “For seven years there were no realistic proposals from the estates” – given the fact that Glitnir and Kaupthing presented their composition draft in 2012 and 2013 and have waited for answers and clear guidelines this is again part of the rhetoric. The government’s tactic has so far been like inviting the creditors to a game of dart without telling them where the dartboard was.

The numbers

As already explained, I doubt the size of the problem as related to the estates: I estimate it being ISK500bn, not ISK900bn. The higher number is, as far as I can see, again to underline the danger and justify the means. But again, this is part of the staged performance; the numbers were flashed up again and again.

Will the stability contribution be ISK500bn? From calculations I have seen the likely contribution is in the range of ISK300bn to ISK420bn, $3.1bn, – reaching ISK500bn does not seem likely. The contribution will be paid over time, most likely two to three years. It depends on values of assets etc that change over time, therefore the uncertainty. Further insight into the numbers can be gauged from the letters received from the three estates, see here. Whatever the estates agree to 60% of creditors have to vote for it.

A tax of ISK682bn, $5bn, as stated in the press release, is also, as far as I understand too high a number; ISK620bn, $4.6bn, would be more likely.

The old overhang will be resolved by the CBI in the classic way of auctioning and offering long-term bonds, no surprise there as this plan is already on-going.

Tax (= stick) or contribution (= carrot)?

What does the government want, a tax or contribution? Interestingly, the tax was the main focus of the presentation and little time and attention given to the contribution. The same in the press release, where composition and contribution is merely mentioned en passant whereas the tax is spelled out in great detail.

This however seems to have been part of the show. I understand that the advisers are wholly on the side of composition and contribution, as are the creditors. The emphasis on the tax would then be wielding the stick to make sure the creditors go for the carrot (another matter if a stick was needed).

While emphasising tax and bankruptcy, the refrain was that the capital controls liberalisation is NOT a money-making scheme for the treasury but to lift the controls and nothing else.

The government’s chief negotiator Lee Buchheit also stressed this aim to the Icelandic media but he did put a number on the outcome. His number was ISK650bn, $4.8bn, (see here, at 9:55 min; the number comes up at 15:49) in spe for the government. As far as I can see, an unrealistically high number, closer to the tax, which no one officially wants, than the desired contribution.

Buchheit had earlier mentioned another thing: that lifting the controls would take a short time, only about six years. This may not be what most people understand as “a short time” but it is a realistic time frame: it will take some time to carry out this plan.

In spite of the emphasis on giving priority to the “real economy” easing of controls for people, businesses and pension funds will only come later. On this, the presentation gave no dates. According to my sources, new Bills in parliament coming autumn or winter will clarify this issue.

Moral hazard and political risk

In spite of the government rhetoric of big funds to come, the debate in Iceland has mostly been characterised by relief: at last a plan, which seems realistic. The opposition has embraced it, pointing out that this is very much what had always been the plan.

There have been some voices asking why Greece and Argentina are struggling with their creditors while Iceland has so effortlessly negotiated with its creditors. The answer is of course that creditors in Iceland are not creditors to the state, contrary to Greece and Argentina, where the problem is sovereign debt; not the case in Iceland.

As stated earlier it is clear that the government aims at composition and contribution, not tax and bankruptcy. There is however always a political risk and the possibility of panic politics. The Progressive party has fallen from 25% of votes in the election in 2013 to 9% in the opinion polls in spite of successfully carrying out the promised “debt correction.”

The party very much got elected on the basis of its promises to fight the “vulture funds,” mentioning ISK800bn days before the election after talking about “only” ISK300bn to ISK400bn. And this was a promise of funds right into the state coffers, not to pay down sovereign debt as is now the plan; a plan that might annually free up ISK30bn, $200m to ISK40bn, $300m, otherwise used on interest payments.

The government had been adamant about not negotiating with creditors. Since talks have been going on over the last months the government has now defined these as “conversations,” not negotiations. No matter the word used it is clear that the largest creditors agree to the plan – and what they agree to is the outlined composition. Tax is a different matter.

For some reason, the old Roman saying “Pacta sunt servanda” has never quite reached Iceland. Icelanders and Icelandic governments over decades have repeatedly understood agreement made as being only valid until they have a different idea as to what they want. This will now again be tested.

Could the composition fail if an agreement on composition is not in place by the agreed deadline at end of the year? My understanding is that this is not likely: if needed, the deadline will be extended but that would of course only happen if things are moving in a realistic way.

Having had their patience tested over the last few years, creditors and the winding-up boards are no doubt both eager and well-prepared for the coming negotiations. Unless there will be a political itch to pick a fight, serving either political interests and/or special interest groups, things could look really bright in Iceland by the end of the year, otherwise the darkest time in Iceland.

In a heavily staged appearance, prime minister Sigmundur Davíð Gunnlaugsson told Icelanders that ISK850bn, ca 45% of Icelandic GDP would fall into the state coffers, used to reduce the public debt, not for pet projects as earlier announced. With

The size of the problem to solve amounts to ISK1200bn, i.e. this is the sum of ISK, in the estates of the banks and Glacier bonds etc., that cannot be converted to FX and therefore cannot be paid out to creditors right now. What amounts to ISK850bn, or 39% of the assets of the estates at the end of this year will have to be paid off in a stability “contribution” if composition is negotiated and then this amount will be reduced – or tax and bankruptcy if no composition, to fulfil what the government calls “stability conditions.”

Glacier bond-holders and others will either be able to take part in auctions in autumn or buy long-term bonds. All of this is done under the auspice of a phrase repeated over and over again: “National interests takes precedence over interests of private parties.” Here is the English press release, carefully worded and not very clear.

After dealing with this amount, pension funds and ordinary Icelanders will have greater movement. Some quick thoughts on some of the topics du jour:

Size of the problem:

It is clear that the ISK300bn (actually ISK290bn) of the remains of the old overhang (see my last blog before this one on the barest essentials) cannot be paid out in FX – so this amount is clearly a part of the problem. But this is already being dealt with and that action will now continue: the CBI will hold auctions in autumn and those ISK-owners can also buy long-term bonds to come, either in ISK of FX.

That leaves ISK900bn – and this is a more questionable size: ISK500bn (ISK507bn exactly) is the number I have been posting earlier as the size of the problem because these are ISK assets. The remaining ISK400bn are FX assets in Iceland, i.e. assets in Iceland paid off in FX, which I would think was a more debatable size but this is how the government defines the size of the problem.

Stability “conditions” – contributions and tax:

So the problem that needs to be solved amounts to ISK1200 – and by reducing it by 39% the rest can be paid out. Or that seems to be the calculation.

The conditions, i.e. the numbers, are non-negotiable, as was repeated again and again. If the estates negotiate a composition by the end of the year they do not pay a tax but a “contribution”: in fact the same numbers, i.e. 39% or ISK850 but – as far as I understand this will be some reduction so the amount will be ISK500-600bn.

If they do not negotiate a composition the estates go into bankruptcy and pay the full amount: 39%.

This leaves some angles since the ISK850 is well above the ISK500bn but not quite the ISK900bn and well, the ISK300bn is outside of this equation. How these numbers were found I do not know but well, this is how the non-negotiable numbers look like.

The non-mentioned dates

Apart from foreign creditors smarting from controls there are the Icelanders: here, pension funds will be able to invest for ISK10bn a year, more or less what they have asked for, until 2020, unclear from when. And ordinary people will at some non-mentioned date be able to feel liberalisation on certain transactions.

What will creditors do?

Some creditors have already been negotiating with representatives of the government so the plan is indeed not quite out of the blue. According to a Glitnir announcement today, 25% of their creditors agree to this.

Kaupthing’s situation is different, less ISK assets, which might mean that Kaupthing creditors will be less happy to pay. However, no chance to tell until there is an announcement. Everyone might be happy to see an end to this and possible payout in sight.

Either this will all go well, composition beckon and much good will. Or not and the future is legal wrangling in multiple jurisdictions for a decade, like in Argentina. Today, the Icelandic government has taken the country on a journey along a very narrow road above a precipice. If all goes well, everyone reaches the final destination on the other side and there will be much rejoice.

The Icelandic government, or some parts of it, keep on its game of leaking key information always to the same journalist. Now it is the first big step towards lifting capital controls. As could be expected, this seems more about political posturing than a convincing solution. The coming measures may however provide creditors with their long awaited break to negotiate. If not, Iceland faces the same as Argentina: years of wrangling with ever more aggressive creditors – as the chief foreign adviser to Iceland should be able to inform the government on, from first hand experience.

In March, the Ministry of Finance published three links to regulation and documents regarding duty of silence of advisers, parliamentarians and civil servants who might be in possession of information related to the lifting of capital controls. This was part of a concerted effort to keep under wraps anything related to the lifting of the capital controls – until that day came when the government announced its plans. Whatever the source, DV’s journalist Hörður Ægisson, who over the last few years has been a diligent receiver of government information, published on Friday the outline of this plan, introduced at a cabinet meeting that day, most likely to be made public at a press conference on Monday. The question is if the Ministry of Finance will now look into this leak, considering the measures it took in March.

The Icelandic media landscape is a sorry sight: independent media is weak, the money is where the special interests are. This will no doubt be made clear yet again in the coming weeks as the details of the capital controls plan-to-come will be discussed and debated.

The estates will now have a few weeks to negotiate a composition agreement. If creditors do not accept the parameters the government has in mind the estates will be put into bankruptcy proceedings. So far, the estates and their creditors have been hoping for a composition, since creditors can then run the estates and resolve it when they deem best contrary to bankruptcy proceedings, which are time-limited. Both proceedings do though have the same aim: to maximize the creditors’ recovery.

The problem at the core of this is the foreign-owned ISK: assets worth ISK320bn in Glitnir, ISK160bn in Kaupthing, which means that the size of the ISK problem is different for the two banks – also making it respectively a different case for the two estates for find a solution. The Icelandic government seems to want to get hold of these ISK assets, remains to be seen how it goes. An expected stability tax of 40% can hardly be on priority claims, because that would then hit the UK claims, not the intention. It is difficult to see that the tax could be put in place sooner than 2017, which means no lifting of controls for Icelandic entities until after that, which means still years of capital controls. However, this is speculation until the plan is published.

Among themselves, the hardliners have been talking about getting creditors with their back to the wall facing a gun, i.e. with no options but to follow the government’s diktat. However, Iceland has a rule of law and creditors have legal options in Iceland and abroad. It remains to be seen, as the Icelandic saying goes, who laughs last.

The worrying thing for Iceland is if protracted legal dispute keeps going for years, hindering the lifting of the capital controls. The government seems to be taking the risk of just kicking the process off, in this way, then seeing where it leads to.

Lee Buchheit, advising the government on these issues as on Icesave earlier, brings with him experience, which hopefully will not be relevant. Cleary Gottlieb, the firm he represents, is adviser to the Argentinian government (not Buchheit though but his colleagues). At a conference in Buenos Aires recently, Buchheit foresaw that Argentina’s dispute with creditors might run for at least a decade. Probably not what Cleary envisaged for its stubborn Argentinian client – and hopefully not what is in spe for Iceland.

It certainly has to be kept in mind that Argentine’s problem is sovereign debt and a mismanaged restructuring whereas Iceland has a balance-of-payment problem vs estates of failed private banks. It would take quite a few wrong steps to put the Icelandic government in the situation where it would be directly in dispute with creditors, as is the Argentinian government. So far, no one has really believed the government could end there.